The Realpolitik of Gold

Transcription

1 The Realpolitik of Gold James Steel Precious Metals Analyst, HSBC Bank USA Introduction Thank you John. The first congratulations go out to the country of Canada, the only country in the world to have successfully resisted two US invasions. The other thing I think is interesting about Canada is that at one time we had net immigration from Canada down into the United States. That has since reversed but in the late 1960s Pierre Trudeau was on a state visit to the United States when some smart alec reporter asked him what he thought of net immigration from Canada into the US, implying of course that the US was a better place to live and work than Canada. So what was Trudeau going to do? He either insults the host country or his domicile. Well he turned around and said he was all for Canadian immigration to the Untied Stated because it raised the average IQ of both nations. Vintage Trudeau. Gold and Historical Events Now actually speaking about Napoleon, who was mentioned earlier, gold has had a tremendous influence on historical events and we are all familiar with the fact that the search for gold led the explorations of North and South America as well as Australasia and Southern Africa but the effective mobilisation of gold has also played a decisive role in winning wars in the past. The United Kingdom successfully mobilised gold during the long wars with revolutionary Napoleonic France. That allowed Pitt the Younger, as well as a number of other Prime Ministers, to successfully bankroll coalition after coalition against Napoleon. 25% of the cost of fighting the American Civil War on the Union s side was borne by gold derived from the Californian mines. The Confederacy unfortunately had no gold. In both World Wars One and Two, the allies mobilised much more effectively, had resources and could tap gold much more effectively than the opposing sides. The only time I can see in modern history where the side that had the most gold failed to actually win the war was during the Spanish Civil War where the Republican side actually held the gold reserves in Madrid but were very ineffective at using them. I think the best term I have ever heard about gold and war has been from Machiavelli, who said that gold will not always get you good soldiers but good soldiers will always get you gold. Gold and Geopolitical Events Gold as a Currency I am moving very quickly now to the global view of gold. It is still viewed not entirely but partially as a commodity in the OECD parts of the world, but mostly as a currency in the emerging parts of the world. That is very important because geopolitical events tend to impact gold more in the emerging and transitional parts of the world than it does in the developed world. We have of course a geopolitical dimension to gold but what I think is most interesting is that it is important to realise that gold does not just reflect the economic and financial climate. It also reflects geopolitical issues as well as even social risks. Gold and the Recent Economic Crisis The fact is that those social risks have risen in the past couple of years. The World Economic Forum has identified major risks that I think are influencing the gold price. In particular, the crisis that we have just been through and are still going through to some extent has weakened governments and their institutions in their ability to combat crisis and that allows for even low level intensity shocks to dislocate markets and push the gold price up. One of the functions of the success in the economy before this crisis was a growth in income and equality. According to what economists call the Gini coefficient, we have seen an increase in income disparity in many of the countries that became large gold consumers, including China, India and Indonesia. This is very much a function of the demand for gold, when you get an economy that is moving rapidly you also get some income inequality. That creates some social unrest, which is also good for gold. The US National Intelligence Council and the European Union s Institute for Security Studies concluded this year that the current framework for 1

2 international cooperation leaves the world ill-equipped to combat the mounting challenges it faces due to the financial and economic crisis. I think this would certainly imply that gold prices are going to go higher. The expansions of the debt to GDP ratios themselves have been cited by the World Economic Forum as likely to increase the geopolitical risk thermometer and create tensions between the world s savers and the world s borrowers. Our own currency forecasters have termed what is happening in the currency markets and government policies in the currency markets and currency wars. In fact, all countries are trying to devalue their currency, which is leading to tensions between them but also is very positive for the price of gold. Certainly, repeatedly high levels of food prices have caused unrest that has been supporting the price of gold in the past couple of years. Gold and Corruption As you can see, this is an interesting chart from a poll taken about world corruption levels. Eight out of ten respondents have increased their corruption levels in their view of corruption for the police, for parliament, for legislatures around the world and for political parties. When you get a rise in the global corruption barometer, you also tend to get an increase in gold prices because the idea of corruption attacks institutions, it makes you unsafe and you lose confidence in policies and in governments, so it tends to lead to buying gold. Gold and Public Satisfaction Here is gold compared to US administrations. You can see that during times of conflict, particularly prolonged conflict, the price of gold tends to go higher. During the Vietnam War, it went higher and of course the more recent wars of Afghanistan and the second war in Iraq have clearly coincided with very high prices. The red is of course where Republicans have been in power and the blue when Democrats have been in power. The important thing to notice is that the three conflicts that US presidents were involved in the first Gulf War, the Bosnian War and Panama were relatively short-lived and deemed as being successful. The conflicts that have been prolonged and like Vietnam, not successful, elucidated high gold prices. 2

3 This leads us to public satisfaction. Gallup ask a representative sample of more than 8,000 Americans every month if they are satisfied or dissatisfied with the way the country is going. In the past couple of years, clearly only a moron would have been satisfied with the ways things have been going. You can see that back in the 1970s and 1980s, when satisfaction levels were relatively high, the gold price did not do well. We had a brief dip in 1991 during the Gulf War but then public satisfaction levels quickly recovered. It has not been until this prolonged decline in the past 10 years that gold prices have really begun to rise. As satisfaction levels dipped below critical levels of 40% to 20% and very low during the depths of the financial crisis, gold really began to soar. There was a recovery under Obama being elected but that has since retraced somewhat. We see the opposite with the gold 3

4 price and dissatisfaction. As dissatisfaction levels remain high, the gold price tends to rally quite sharply. There are years when the correlation is very strong on a statistical level. As long as satisfaction levels do not rise above this critical 50%, the gold market tends not to rally. Yet, when it does rise, it shoots up quite quickly. Gold and US Presidents Once a week, Gallup asks people about how the President is doing. They ask a larger number than the 8,000 asked on how the country is going. We can see that gold has tended to weaken under the more popular presidents. Under Ronald Reagan, gold remained fairly low and only rose really during Iran-Contra. Under Jimmy Carter, who was a relatively unpopular President, the gold market moved up sharply as his popularity fell. Under Richard Nixon who was of course very unpopular towards the end when he resigned, the gold market moved up sharply. It is hard to see on the scale sometimes but the gold market did move. Under George Herbert Walker Bush, his popularity remained rather neutral and the gold price remained quite steady. 4

5 We are getting into more interesting territory when we look at Bill Clinton. He was even more popular than Reagan and gold fell to its lowest level of $250 in the middle of his second term. It is interesting because I also looked at the international popularity ratings of Clinton and the dissatisfaction with Clinton only really rose during the Monica Lewinsky scandal. In every country in the world, his popularity went down with the exception of France in that period. I voted for Bill twice by the way, I am a great fan for all sorts of reasons. When George Bush came into power, we had a fairly high satisfaction rating until involvement in foreign wars when his entire presidency was steadily moving lower. This was when gold first went over $1,000. It went over $1,000 in the month that the casualty lists from Iraq were at their highest. At the peak of the Iraqi violence, gold moved over $1,000 and his ratings went to their lowest. Under Obama, we had a brief pull back because his ratings were rather high when he came into office. Since then they have gone down and gold prices have gone higher. Looking at Obama s presidency, you can see that as he broke the 50% level for approval ratings, the gold market had really shot up. As his disapproval ratings have gone up to near record levels of close to 60%, the market has continued to rise. Gold and the Changing World I should really point out something on this previous chart that is wider than just the presidents. If you think about the world during 1991 to 2001, and the discussion about central banks selling was mentioned earlier, you really have a point where the Cold War ended; central banks did not need gold as a war chest so they tended to sell; you had the dollar as the world s supreme and unchallenged asset and you had the US as the world s unchallenged power. In fact, political scientists called it the unipolar world. You also had a decline in capital exchange restrictions, an increase in immigration and a record number of democracies. The gold market started to rally a few months before 9/11 and since then we have seen setbacks to globalisation, the challenging of the US and scientists are now calling it a multipolar world that we are entering into it. That can be quite dangerous because no particular power bloc has power over the others. I think that is very interesting that as we move into a more uncertain world, the gold market has done particularly well. Gold and US Governments The next two charts show that when the Democrats are in power, the gold market tends to rally in the Senate. 5

6 Until recently when the Republicans have been in power as well, we have also had a rally. Of course that has also coincided with war. We have gone through some of these events already but you can see that the previous peak for gold on the bottom slide, which was from 1979 up until 1980, coincided with a high number of conflicts throughout the world. As those conflicts settled down, we go through this period from 1991 until 2001 where we had relatively low conflict and the gold market began to ease. This is the period I referred to earlier with the beginning of globalisation and the end of the Cold War. Since then of course with the invasion of Iraq and the attack of 9/11, we have had a new form of geopolitical risk coming into the market. The acceleration of food prices has also been a factor. We have seen the UN declare two food crises in the last three years and that has triggered higher prices in gold too. 6

7 Conclusion To sum up, when you see the forces of the left, forces of regulation and state control on the rise, as they are currently, the gold price tends to do very well. When you have free market forces on the right doing particularly well, you tend to see the gold market go down. I am just going to read this out, which is rather amusing from a number of points of view. This is a group of people who are pro and anti-gold. The anti-gold historical people have included Karl Marx, Vladimir Lenin, Joseph Stalin, Mussolini, Adolf Hitler, Mao Tse Tung, Franklin Roosevelt, Richard Nixon and Gordon Brown. On the pro side, there has been Adam Smith, Winston Churchill, Charles de Gaulle, Konrad Adenauer, as well as Rajiv Ghandi, Deng Xiaoping and Alan Greenspan as well as Ayn Rand. So decide on which of those two sides you want to be. Thank you very much. 7